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An Agent-Based Model To Forecast The Inflation Rate In The Eurozone: Incorporating Microfoundations Into Complex Behavioral Models

APPLIED BEHAVIORAL ECONOMICS RESEARCH AND TRENDS(2017)

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Abstract
The aim of the agent-based model presented in this chapter is to explain the determinants of inflation and to forecast the inflation rate in the Eurozone for the next five years. The behaviors of agents and their expectations are interrelated and explained by macroeconomic models applied to heterogeneous agents of three classes: individuals, companies and financial institutions. In addition, the behavior of public sector and central bank is also modeled with a single agent of each kind. Once the quantitative easing policy is implemented, the quantitative theory of money expects higher inflation rates in the long run. Inflation should remain low taking into account the Phillips-Curve. Last, according to the Aggregated Supply and Demand as well as to the Money Market equilibrium, the behaviors modeled allow forecasting low inflation. However, an external shock, as it would be an increase in the price of important commodities, can alter the inflation rate to a great extent.
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